Could an auto restorer deduct services sold to dealerships for resale, or rely on dealer-issued NTTCs, when the vehicles were later subject to motor vehicle excise tax?

Plain-English summary

Hubbard Lovell's auto-detailing and restoration receipts from car dealerships were taxable because the dealerships' vehicle resales were not subject to gross receipts tax. The dealer-issued NTTCs did not create a deduction or safe harbor for transactions that no statute made deductible.

Hubbard Lovell restored used vehicles before dealership resale, doing work beyond car washing such as upholstery and body repair and replacing visible engine-block parts. Three registered dealers supplied older Type 1, Type 2, or Type 13 NTTCs, so Hubbard Lovell did not collect or pay gross receipts tax on those services.

Service-for-resale treatment failed at the final sale

Section 7-9-48 allowed a deduction when a service was resold in the buyer's ordinary course of business and that resale was subject to gross receipts tax. A Type 5 NTTC ordinarily supported that deduction.

But the dealerships' vehicle sales were exempt from gross receipts tax under Section 7-9-22 because they were subject to motor vehicle excise tax. The required taxable resale therefore never occurred, so the detailing and restoration services did not qualify for the deduction.

The difference between high-end restoration and ordinary car washing did not change the analysis. Both were separate businesses providing services to prepare vehicles for dealer resale.

The certificates did not create a deduction

The Type 1 and Type 13 certificates related to manufacturer deductions, and the Type 2 certificate also did not cover this service-for-resale claim. More fundamentally, no NTTC could transform these taxable services into deductible receipts when the statutory resale condition was impossible to meet.

Section 7-9-43's good-faith safe harbor protected a properly covered transaction, not one outside every recognized deduction. Hubbard Lovell also made no meaningful inquiry into whether its services were covered, despite the seller's duty to check at each transaction and remain responsible for the service type.

Not collecting tax and inability to pay were not defenses

New Mexico gross receipts tax fell on Hubbard Lovell as the business, whether or not it passed the cost to dealerships. Retirement and inability to recover the tax later did not provide a statutory hardship exception.

The AHO also upheld penalty because failure to investigate and pay was negligence, and interest was mandatory until principal tax was paid.

Result: protest DENIED. At the hearing, the remaining balances were:

• 2011: $883.84 tax, $176.76 penalty, and $87.33 interest—$1,147.93 total;
• 2012: $544.57 tax, $108.91 penalty, and $33.24 interest—$686.72 total.

Interest continued to accrue on unpaid principal.

What this means for you

Auto detailers and vehicle-service businesses

Do not assume a dealership's resale automatically makes your service deductible. Determine which tax applies to the dealer's final sale and whether the statute requires that sale to be subject to gross receipts tax.

Sellers accepting NTTCs

Confirm that the certificate type matches the property or service and that an actual statutory deduction covers the transaction. Possession alone is not a universal safe harbor.

Businesses deciding whether to pass tax through

The legal liability remains with the New Mexico seller. If you choose not to charge the customer, you may still owe tax from your own receipts.

Common questions

Q: Why did the service-for-resale deduction fail?
A: The dealerships' vehicle resales were exempt from gross receipts tax and subject to motor vehicle excise tax.

Q: Did Hubbard Lovell have a Type 5 NTTC?
A: No. It had Type 1, Type 2, and Type 13 certificates.

Q: Would any NTTC have made these transactions deductible?
A: The AHO said no certificate could create a deduction where the required gross-receipts-taxable resale could never occur.

Q: Did good-faith acceptance protect the seller?
A: No. The certificates did not cover the services, and Hubbard Lovell did not investigate whether the transactions qualified.

Q: Did inability to pay remove the assessment?
A: No. The cited law supplied no ability-to-pay abatement for a legally due assessment.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-22, 7-9-43, and 7-9-48 — motor-vehicle-sale exemption, NTTC safe harbor, and service-for-resale deduction
• NMSA 1978, §§ 7-9-3.3, 7-9-3.5, 7-9-4, and 7-9-5 — gross receipts tax framework
• NMSA 1978, §§ 7-1-67 and 7-1-69 — mandatory interest and negligence penalty
• Regulations 3.2.201.15 and 3.2.4.8 NMAC — seller's NTTC duties and incidence of gross receipts tax

Cases and guidance cited:

• McKinley Ambulance Service v. Bureau of Revenue, 1979-NMCA-026 — safe harbor did not apply unless the certificate covered the receipts
• Gas Co. v. O'Cheskey, 1980-NMCA-085 — an NTTC does not transform a taxable transaction into a nontaxable one
• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — duty to determine possible tax consequences
• Department Ruling 401-00-1 — detailing service sold to dealers did not qualify under Section 7-9-48

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Hubbard Lovell & Co.
• Decision PDF: D&O 16-12

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
HUBBARD LOVELL & CO. No. 16-12
TO ASSESSMENTS ISSUED UNDER LETTER
ID NO.’s L1823850544 and L0750108720

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on December 9, 2015 before

Brian VanDenzen, Esq., Chief Hearing Officer, in Santa Fe. At the hearing, Lovell Hubbard and

Reggie Hubbard appeared pro se for Hubbard Lovell & Co. (“Taxpayer”), along with Taxpayer

witness Randy Price. Staff Attorney Gabrielle Dorian appeared representing the State of New

Mexico Taxation and Revenue Department (“Department”). Protest Auditor Nicholas Pacheco

appeared as a witness for the Department. Department Exhibits A-F were admitted into the

record. All exhibits are more thoroughly described in the Administrative Exhibit Coversheet.

Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. On June 29, 2015, through letter id. no. L1823850544, the Department assessed

Taxpayer for $1,897.92 in gross receipts tax, $379.58 in penalty, and $210.15 in interest for a

total assessment of $2,487.65 for the CRS reporting periods from June 1, 2011 through

December 31, 2011.

2. On June 29, 2015, through letter id. no. L0750108720, the Department assessed

Taxpayer for $1,571.80 in gross receipts tax, $314.36 in penalty, and $125.42 in interest for a
total assessment of $2,011.58 for the CRS reporting periods from June 1, 2012 through

December 31, 2012.

3. On September 22, 2015, Taxpayer protested the Department’s assessments.

4. On September 24, 2015, the Department’s protest office acknowledged receipt of

the protest.

5. On November 2, 2015, the Department filed a request for hearing in this matter

with the Administrative Hearings Office, an agency independent of the Department under the

Administrative Hearings Office Act.

6. On November 3, 2015, the Administrative Hearings Office sent Notice of

Administrative Hearing, scheduling this matter for a merits hearing on December 9, 2015.

7. On December 9, 2015, within 90-days of the Department’s receipt and

acknowledgement of a valid protest, the Administrative Hearings Office conducted a hearing in

the above-captioned matter.

8. Mr. Lovell Hubbard is the owner and operator of Taxpayer.

9. Taxpayer provides auto restoration and detailing services in New Mexico,

primarily to car dealerships in preparation for sale of vehicles. Restoration and detailing work

encompasses far more than car-washing services; it includes repairing upholstery, repairing a

vehicle’s body, replacing parts visible in the engine block, etc.

10. Car dealerships would bring Taxpayer a used vehicle needing restoration before

they could resell the vehicle.

11. The car dealerships would provide Taxpayer with a nontaxable transaction

certificate (“NTTC” or “NTTCs”) and would not pay Taxpayer gross receipts tax.

In the Matter of the Protest of Hubbard Lovell & Co., page 2 of 16

12. In particular, three car dealerships all listed in the Motor Vehicle Division’s

registered motor vehicle dealer list executed NTTCs to Taxpayer for Taxpayer’s services:

a. Taxpayer received a Type 2 NTTC executed on February 2, 2007 from one car

dealership. [Dept. Ex. B & F].

b. Taxpayer received a Type 13 NTTC executed on November 20, 1996, and a Type

1 NTTC executed November 20, 1996 from another car dealership. [Dept. Ex. C,

D, & F].

c. Taxpayer received a Type 13 NTTC executed on November 4, 1997 from the

third car dealership. [Dept. Ex. E & F].

13. Taxpayer did not collect gross receipts taxes on the services it performed for car

dealerships that provided it with a NTTC.

14. Without doing any further inquiry with the car dealerships, the Department, or a

tax professional, Taxpayer believed that the NTTCs provided to it by the car dealerships

exempted it from gross receipts tax. Along those lines, Mr. Hubbell stated his focus was on

running his own business, not on running the car dealership’s business, so once he received the

NTTCs from the car dealerships he believed Taxpayer did not need to pay gross receipts tax on

those transactions.

15. The Department did make a series of pre-hearing abatements in Taxpayer’s favor

that reduced the assessed amounts.

16. As of the date of hearing, for the CRS reporting period ending on December 31,

2011, Taxpayer owed $883.84 in gross receipts tax, $87.33 in interest, and $176.76 in penalty for

a total outstanding liability of $1,147.93. As of the date of hearing, for the CRS reporting period

In the Matter of the Protest of Hubbard Lovell & Co., page 3 of 16
ending on December 31, 2012, Taxpayer owed $544.57 in gross receipts tax, $33.24 in interest,

and $108.91 in penalty for a total outstanding liability of $686.72. [Dept. Ex. A].

DISCUSSION

There are two main issues in this protest. The first issue is whether any deduction from

gross receipts tax applies to the services performed by Taxpayer for the car dealerships. The

second issue is whether Taxpayer’s timely receipt of properly executed NTTCs provides

Taxpayer with safe-harbor from the assessed tax.

Presumption of Correctness.

Under NMSA 1978, Section 7-1-17 (C) (2007), the assessments issued in this case are

presumed correct. Consequently, Taxpayer has the burden to overcome the assessments. See

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. Unless otherwise specified, for the

purposes of the Tax Administration Act, “tax” is defined to include interest and civil penalty. See

NMSA 1978, §7-1-3 (X) (2013). Under Regulation 3.1.6.13 NMAC, the presumption of

correctness under Section 7-1-17 (C) extends to the Department’s assessment of penalty and

interest. See Chevron U.S.A., Inc. v. State ex rel. Dep't of Taxation & Revenue, 2006-NMCA-50,

¶16, 139 N.M. 498, 503 (agency regulations interpreting a statute are presumed proper and are to be

given substantial weight).

Moreover, “[w]here an exemption or deduction from tax is claimed, the statute must be

construed strictly in favor of the taxing authority, the right to the exemption or deduction must be

clearly and unambiguously expressed in the statute, and the right must be clearly established by the

taxpayer.” Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024, ¶16, 111

N.M. 735 (internal citation omitted); See also TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-

In the Matter of the Protest of Hubbard Lovell & Co., page 4 of 16
NMSC-7, ¶9, 133 N.M. 447. Because Taxpayer is claiming a deduction from gross receipts tax,

Taxpayer must establish its right to claim the deduction.

Gross Receipts Tax and the Motor Vehicle Excise Tax

For the privilege of engaging in business, New Mexico imposes a gross receipts tax on the

receipts of any person engaged in business. See NMSA 1978, § 7-9-4 (2002). Under NMSA

1978, Section 7-9-3.5 (A) (1) (2007), the term “gross receipts” is broadly defined to mean

the total amount of money or the value of other consideration received from
selling property in New Mexico, from leasing or licensing property employed in
New Mexico, from granting a right to use a franchise employed in New Mexico,
from selling services performed outside New Mexico, the product of which is
initially used in New Mexico, or from performing services in New Mexico.

“Engaging in business” is defined as “carrying on or causing to be carried on any activity with

the purpose of direct or indirect benefit.” NMSA 1978, § 7-9-3.3 (2003). Gross receipts applies

to the performance of a service in New Mexico. See NMSA 1978, § 7-9-3.5 (2007). Under the

Gross Receipts and Compensating Tax Act, there is a statutory presumption that all receipts of a

person engaged in business are taxable. See NMSA 1978, § 7-9-5 (2002). In this case, there is no

doubt that Taxpayer was an entity engaged in the business of performing high-quality auto detailing

and vehicle restoration services. Thus, under Section 7-9-5, all of Taxpayer’s receipts are statutorily

presumed subject to gross receipts tax.

The New Mexico Gross Receipts and Compensating Tax Act provides numerous deductions

of gross receipts tax. Taxpayer did not assert any specific deduction that it was claiming in this case.

However, a deduction potentially pertinent to this case is the sale of a service for resale deductible

In the Matter of the Protest of Hubbard Lovell & Co., page 5 of 16
under NMSA 1978, Section 7-9-48 (2000). Section 7-9-48 (emphasis added) states that:

Receipts from selling a service for resale may be deducted from
gross receipts or governmental gross receipts if the sale is made to a
person who delivers a nontaxable transaction certificate to the seller.
The buyer delivering the nontaxable transaction certificate must
resell the service in the ordinary course of business and the resale
must be subject to the gross receipts tax....

The deduction is premised on the sale of a service for resale when the resale occurs in the regular

course of business and the resale is subject to New Mexico gross receipts tax. If the resale is not

subject to gross receipts tax, the transaction is not covered by the deduction under Section 7-9-48,

and thus is taxable to the original seller of the service. This deduction must be supported by a Type

5 NTTC, which Taxpayer did not possess in this matter.

Under NMSA 1978, Section 7-9-22 (2004), the sale of motor vehicles subject to the Motor

Vehicle Excise Tax is exempt from New Mexico gross receipts tax. Since the resold vehicles were

subject to the Motor Vehicle Excise Tax, the resale of the vehicles was exempt from New Mexico

gross receipts tax. Consequently, the deduction under Section 7-9-48 does not apply to the

transactions at issue in this protest and Taxpayer should have been paying the gross receipts tax on

these transactions.

Taxpayer referenced that it was unfair to hold it liable to a change in the law in 2008 when it

had conducted business this way since 1977. It is unclear what specific change of law Taxpayer

believes occurred in 2008. The clear language of the deduction under Section 7-9-48, established

well before 2008, premises the deduction on an end sale subject to gross receipts tax. Moreover, in

1997, the Administrative Hearings Office predecessor agency, the Hearings Bureau, issued a

decision and order In the Matter of the Protest of Done-Rite Detail, No. 97-36 (non-precedential but

nevertheless persuasive). That publicly available decision and order found that the deduction under

Section 7-9-48 does not apply to auto-detailing services performed for car dealerships because the

In the Matter of the Protest of Hubbard Lovell & Co., page 6 of 16
end sale of the vehicle was not subject to gross receipts tax. Further, publicly available Department

Ruling 401-00-1, issued on January 18, 2000, makes clear that because “car dealers are not subject

to gross receipts tax on the sale of automobiles to their customers… the deduction provided in

Section 7-9-48 NMSA 1978” is not applicable to a car washing and detailing service selling their

services to the car dealership. While Taxpayer tried to distinguish the nature of its business as a

high-end auto-detailer from the car washer discussed in Ruling 401-00-1, that is not a material

difference in the analysis as both a car wash and Taxpayer were separate businesses providing a

service to an auto dealership in preparation for resale of the vehicle1.

Further, the fact that Taxpayer did not collect gross receipts tax on these transactions, as

Taxpayer argued at hearing, is no defense to the Department’s assessments. The legal incidence of

New Mexico gross receipts tax falls on the person engaged in business, which in this case is

Taxpayer. See NMSA 1978, § 7-9-4 (2010) (New Mexico gross receipts tax imposed upon a person

engaging in business); see also Regulation 3.2.4.8 NMAC (4/30/01) (a person engaged in business

is solely liable for gross receipts tax and are not collectors on behalf of state); See also Tiffany

Construction Company v. Bureau of Revenue, 96 N.M. 296, 300, 629 P.2d 1225, 1229 (1981).

Taxpayer was an entity engaged in business, with all its receipts presumed subject to gross

receipts tax. Absent Taxpayer establishing an applicable exemption or deduction shielding the

receipts from gross receipts tax, the burden is on Taxpayer to pay gross receipts on that tax

regardless of whether Taxpayer passed on the cost of that tax to its customers.

Taxpayer did not articulate any other specific statutory deduction it was claiming. Again, as

discussed and cited above, it is Taxpayer who carries the burden to overcome the presumption of

1
There was some discussion at hearing from Taxpayer’s witness that just like the car dealership’s auto-mechanic
services in preparing the car for resale are not subject to gross receipts tax, Taxpayer’s detailing services should
equally not be subject to tax. While that issue is not before the Administrative Hearings Office, unlike a dealership’s
own in-house auto-mechanic staff, Taxpayer is a distinct business with its own receipts from the transaction
presumed subject to gross receipts tax.

In the Matter of the Protest of Hubbard Lovell & Co., page 7 of 16
correctness on the assessment and to establish entitlement to a claimed to deduction. Even in the

absence of an assertion of a specific deduction, a quick review of the statutes under the Gross

Receipts and Compensating Tax Act does not show any other particular deduction that might be

relevant to this case. The sale of a service for resale actually requires a Type 5 NTTC rather than the

Type 2 that Taxpayer possessed. The Type 1 and Type 13 NTTCs (series 1993) that Taxpayer

possessed in this case relate to manufacturers deductions, none of which appear applicable to the

facts of this case.

Finally, because Mr. Hubbard did not collect the tax at the time of the transactions and

has subsequently retired, Taxpayer argued that it was no longer in a position to pay the assessed

tax liability. However, inability to pay is not grounds to abate an assessment. The Department is

required to assess a taxpayer for any tax liability exceeding $25.00. See § 7-1-17 (A). NMSA 1978,

Section 7-1-20 (1995) only allows the Department to compromise on a tax assessment when it has

a “good faith doubt” to the liability. That section does not contain any financial hardship exception.

Further, Regulation 3.1.6.14 NMAC (01/15/01) does not allow the Department to abate otherwise

legally required assessments based on Taxpayer’s ability to pay.

Does the NTTC, good-faith, safe harbor provision apply?

While the transactions at issue were not deductible under Section 7-9-48, and Taxpayer

did not assert any other potential statutory basis for a deduction, Taxpayer did nevertheless argue

that by receiving and relying on NTTCs, no gross receipts tax is owed. This raises a potential

question about whether the good-faith, safe harbor protection under NMSA 1978, Section 7-9-43

(A) (2011) might still give Taxpayer relief from paying the assessed tax.

In the Matter of the Protest of Hubbard Lovell & Co., page 8 of 16
Section 7-9-43 (A) grants taxpayers a good-faith acceptance, conclusive evidence safe

harbor from taxation in some circumstances:

[w]hen the seller or lessor accepts a nontaxable transaction certificate within
the required time and in good faith that the buyer or lessee will employ the
property or service transferred in a nontaxable manner, the properly executed
nontaxable transaction certificate shall be conclusive evidence, and the only
material evidence, that the proceeds from the transaction are deductible from
the seller's or lessor's gross receipts.

In other words, the statute grants the seller of the service safe harbor from taxation when the seller

timely accepts a properly executed NTTC in good faith from the buyer. Regulation 3.2.201.15

NMAC (05/31/01) discusses good faith acceptance of a NTTC:

Acceptance of [NTTCs] in good faith that the property or service sold
thereunder will be employed by the purchaser in a nontaxable manner is
determined at the time of each transaction. The taxpayer claiming the
protection of a certificate continues to be responsible that the goods
delivered or services performed thereafter are of the type covered by the
certificate.

The Administrative Hearings Office, and its predecessor the Hearings Bureau, have

employed a broader view of the good-faith, safe harbor protection since the 2013 issuance of the

decision and order In the Matter of the Protest of Case Manager, No. 13-12 (non-precedential) and

In the Matter of the Protest of Rio Grande Electric Co., Inc, No. 13-16 (non-precedential). In an

unpublished decision, the New Mexico Court of Appeals affirmed the ruling in the Case Manager

decision and order narrowly under a right for any reason standard. See New Mexico Taxation and

Revenue Dep’t. v. Case Manager, No. 32,940 (N.M. Ct. App. April 29, 2015) (non-precedential).

However, even under the broader reading of the safe harbor protection employed since the

issuance of the In the Matter of the Protest of Case Manager and In the Matter of the Protest of Rio

Grande Electric Co., Inc, decisions, the good-faith, safe-harbor provision is limited to cases where

the underlying transaction itself is otherwise covered by a recognized statutory deduction. See In the

In the Matter of the Protest of Hubbard Lovell & Co., page 9 of 16
Matter of the Protest of Adecco USA, Inc., Decision and Order No. 14-16 (non-precedential); See

also In the Matter of the Protest of The GEO Group, Inc., Decision and Order No. 14-36 (non-

precedential). That is, the safe harbor provision cannot serve to make a taxable transaction not

covered by any recognized statutory deduction into a nontaxable transaction merely by possession

of a NTTC.

In McKinley Ambulance Serv. v. Bureau of Revenue, 1979-NMCA-026, ¶10, 92 N.M. 599,

the Court of Appeals held that the good faith safe harbor provision did not protect a seller from

taxation “unless the certificate covered the receipts in question.” The court went on to say that since

there was “no certificate applicable” for the type of services that taxpayer provided, the

Department’s denial of the deduction was proper. See McKinley, ¶13. Although perhaps in dicta,

consistent with McKinley, the Court of Appeals stated in Gas Co. v. O'Cheskey, 1980-NMCA-085,

¶12, 94 N.M. 630 that “[t]he issuance of a ‘Nontaxable Transaction Certificate’ does not operate to

transform an otherwise taxable transaction into a nontaxable transaction.” Further, in Arco

Materials, Inc. v. Taxation & Revenue Dep't, 1994-NMCA-062, 18 N.M. 12 (overturned on other

grounds), the New Mexico Court of Appeals relied on a taxpayer’s continuing obligation to ensure

that the NTTC covers the type of goods sold in finding that a taxpayer was not entitled to a

deduction when the transaction was no longer subject to a deduction. While there is some language

in Leaco Rural Tel. Coop. v. Bureau of Revenue, 1974-NMCA-076, ¶15, 86 N.M. 629 and

Continental Inn v. N.M. Taxation and Revenue Dep’t., 1992-NMCA-030, 113 N.M. 588

suggestive that timely, good faith acceptance of a properly executed NTTC is enough for a taxpayer

to claim a deduction even if the transaction itself did not fall under any recognized deduction2, that

2
This issue was thoroughly discussed by the undersigned In the Matter of the Protest of Case Manager decision and
order and will not be fully repeated here in the interest of brevity.

In the Matter of the Protest of Hubbard Lovell & Co., page 10 of 16
language must be read in the context of the subsequent case law addressed above, McKinley , Gas

Co., and Arco Materials.

The problem with applying the good-faith, safe harbor provision in this case, and what

makes this case distinguishable from Continental Tire, is that under no circumstance could these

transactions qualify for the deduction because the car dealerships would pay the Motor Vehicle

Excise Tax rather than the gross receipts tax. Because the transactions at issue in this protest could

never be the covered by the recognized deduction under Section 7-9-48, there was no NTTC

certificate applicable to Taxpayer’s services and Taxpayer’s acceptance of a NTTC in this instance

does not convert what was clearly a taxable transaction into nontaxable one. See McKinley, ¶13; See

also Gas Co. ¶12.

As mentioned, the Continental Inn case is distinguishable from the facts of the present

protest because in that case the transactions were potentially deductible under a recognized

deduction if the buyer in that case had followed through the usual requirements of the Gross

Receipts and Compensating Tax Act. In Continental Inn, a general contractor constructing an inn

issued NTTCs to subcontractors. See id. at ¶1-3. The Court of Appeals noted that transactions

themselves were potentially deductible under two recognized deductions if the general contractor

ultimately paid gross receipts tax on the sale of the constructed inn. See id. at ¶7. However, for

uncertain if not inexplicable reasons, the general contractor choose not to pay gross receipts tax

on the constructed inn. See id. The Department pursued the general contractor with a

compensating tax assessment3, which the Court of Appeals ultimately upheld. In addressing one

of that taxpayer’s arguments, the Court of Appeals in Continental Inn reviewed the good-faith,

3
Because Taxpayer did not present the Type 5 NTTC required for the sale of a service for resale, Regulation 3.2.206.8
NMAC, which allows the Department to impose a compensating tax against the buyer when the buyer incorrectly issues
an appropriate NTTC, is not applicable to this case.

In the Matter of the Protest of Hubbard Lovell & Co., page 11 of 16
safe harbor provision under Section 7-9-43 and found that the general contractor’s issuance of

the NTTCs to the subcontractors “represented to the subcontractors that the use of the NTTCs

was such that the subcontractors were entitled to the deduction from gross receipts.” id. ¶13. This

statement is arguably dicta, since the case involved Taxpayer’s liability for compensating tax

rather than the subcontractors’ ability to claim a deduction. But even if applicable, Continental

Inn is still distinguishable from this in that the transactions with the subcontractors in

Continental Inn would have qualified for a recognized deduction but for the buyer’s failure to

otherwise proceed as expected in the transaction; in this protest, there is no circumstance where

the transaction could have qualified for any recognized deduction because the buyer of the

services—the car dealerships—subsequent resale of the vehicles would never be subject to gross

receipts tax. There simply exits no deduction from payment of gross receipts tax based on the

later collection of the motor vehicle excise tax. Nor would such a deduction be consistent with

the idea behind gross receipts tax deductions of reducing tax pyramid within the broad-based

gross receipts tax across multiple transactions and multiple businesses.

Moreover, it cannot be said in this case that Taxpayer’s acceptance of the NTTCs was made

in good-faith. At one point, Taxpayer said its only obligation was to run its own business and not

worry about the car dealership’s business; when they presented the NTTCs as part of their business,

that was enough for him to proceed without paying a gross receipts tax. But when claiming a

deduction premised on the good faith acceptance of a NTTC, the language of Section 7-9-48 and the

requirements of Regulation 3.2.201.15 NMAC establish that the accepting seller has some

obligation at the time of the transaction to check whether the services will be used in a nontaxable

manner—i.e. will be resold in the regular course of business in a sale subject to gross receipts tax—

and a continuing obligation thereafter to ensure that the services provided are of the type covered

In the Matter of the Protest of Hubbard Lovell & Co., page 12 of 16
by the certificate. It does not appear that Taxpayer took any actions (even minimally) to ensure that

his services sold in the transaction would be of the type covered by the certificate, as specified by

Regulation 3.2.201.15 NMAC. If Taxpayer would have taken such minimal steps, either directly or

through consultation with a tax professional, Taxpayer would have quickly learned that the

transaction was not deductible under clear language of Section 7-9-48 requiring that the subsequent

resale be subject to gross receipts tax, the 1997 published decision and order In the Matter of the

Protest of Done-Rite Detail, No. 97-36, and the published 2000 Department ruling 401-00-1.

Because of Taxpayer’s inaction despite the requirements of Regulation 3.2.201.15 NMAC,

Taxpayer did not establish the good-faith acceptance contemplated and required under Section 7-9-

43 (A) before the good-faith, safe harbor provision could apply.

Interest and Penalty.

Since Taxpayer challenged all of the assessments, interest and penalty will briefly be

addressed even though they were not expressly argued at hearing. When a taxpayer fails to make

timely payment of taxes due to the state, “interest shall be paid to the state on that amount from

the first day following the day on which the tax becomes due...until it is paid.” NMSA 1978, § 7-1-

67 (2007) (italics for emphasis). Under the statute, regardless of the reason for non-payment of

the tax, the Department has no discretion in the imposition of interest, as the statutory use of the

word “shall” makes the imposition of interest mandatory. See Marbob Energy Corp. v. N.M. Oil

Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24. The language of Section 7-1-67 also

makes it clear that interest begins to run from the original due date of the tax until the tax principal

is paid in full. In this case, the Department has no discretion under Section 7-1-67 and must assess

interest against Taxpayer from when the tax was originally due until Taxpayer pays the gross

receipts tax principal in this matter.

In the Matter of the Protest of Hubbard Lovell & Co., page 13 of 16
When a taxpayer fails to pay taxes due to the State because of negligence or disregard of

rules and regulations, but without intent to evade or defeat a tax, NMSA 1978 Section 7-1-69

(2007) requires that

there shall be added to the amount assessed a penalty in an amount equal
to the greater of: (1) two percent per month or any fraction of a month
from the date the tax was due multiplied by the amount of tax due but not
paid, not to exceed twenty percent of the tax due but not paid.

(italics added for emphasis).

The statute’s use of the word “shall” makes the imposition of penalty mandatory in all instances

where a taxpayer’s actions or inactions meets the legal definition of “negligence.” See Marbob

Energy Corp , ¶22 (use of the word “shall” in a statute indicates provision is mandatory absent clear

indication to the contrary).

Regulation 3.1.11.10 NMAC defines negligence in three separate ways: (A) “failure to

exercise that degree of ordinary business care and prudence which reasonable taxpayers would

exercise under like circumstances;” (B) “inaction by taxpayer where action is required”; or (C)

“inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.” In this

case, Taxpayer was negligent under Regulation 3.1.11.10 (B) & (C) NMAC because Taxpayer

failed to report and pay gross receipts tax when due. While Taxpayer credited this problem to the

car dealerships’ presentation of the NTTCs, under New Mexico's self-reporting tax system, “every

person is charged with the reasonable duty to ascertain the possible tax consequences” of his or her

actions, which as discussed above Taxpayer did not do in this instance. Tiffany Construction Co. v.

Bureau of Revenue, 1976-NMCA-127, ¶5, 90 N.M. 16. In New Mexico a lack of knowledge of

the requirements of taxation, inadvertent error, and/or erroneous belief constitutes the civil

negligence subject to penalty under Section 7-1-69. See El Centro Villa Nursing Center v.

Taxation and Revenue Department, 1989-NMCA-070, 108 N.M. 795 (inadvertent error constitutes

In the Matter of the Protest of Hubbard Lovell & Co., page 14 of 16
civil negligence). Although there was some minimal evidence presented that at one point, Taxpayer

had an accountant, that accountant was not in place during the period in question and thus there

were no grounds to find nonnegligence in this case. The Department’s assessment of penalty and

interest in this matter was appropriate and Taxpayer’s protest is denied.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the Department’s denial of the claim for

refund, and jurisdiction lies over the parties and the subject matter of this protest.

B. The hearing was timely set and held within 90-days of protest under NMSA 1978,

Section 7-1B-8 (2015).

C. Taxpayer did not overcome the presumption of correctness that attached to the

assessments under NMSA 1978, Section 7-1-17 (C) (2007) and Archuleta v. O'Cheskey, 1972-

NMCA-165, ¶11, 84 N.M. 428 and did not establishment entitlement to any specific statutory

deduction.

D. The sale of a motor vehicle subject to the excise tax is exempt from gross receipts

tax under NMSA 1978, Section 7-9-22 (2004).

E. The transactions at dispute in this protest were not eligible for the sale of a service

for resale deduction under NMSA 1978, Section 7-9-48 (2000) because the subsequent resale of the

restored cars by the auto dealerships were exempt pursuant to NMSA 1978, Section 7-9-22 (2004)

from gross receipts tax.

F. Because the no deduction or certificate covered the transaction at issue, Taxpayer

did not establish good-faith acceptance of the NTTCs and thus was not entitled to NMSA 1978,

Section 7-9-43 (A)’s safe harbor protection. See McKinley Ambulance Serv. v. Bureau of Revenue,

1979-NMCA-026, ¶10, 92 N.M. 599.

In the Matter of the Protest of Hubbard Lovell & Co., page 15 of 16
G. Under NMSA 1978, Section 7-1-67 (2007), Taxpayer is liable for accrued interest

under the assessment. Interest continues to accrue until the tax principal is satisfied.

H. Under NMSA 1978, Section 7-1-69 (2007), Taxpayers are liable for civil

negligence penalty under the negligence definition found under Regulation 3.1.11.10 (C) NMAC.

For the foregoing reasons, the Taxpayers’ protest IS DENIED. As of the date of hearing,

for the CRS reporting period ending on December 31, 2011, Taxpayer owed $883.84 in gross

receipts tax, $87.33 in interest, and $176.76 in penalty for a total outstanding liability of

$1,147.93. As of the date of hearing, for the CRS reporting period ending on December 31, 2012,

Taxpayer owed $544.57 in gross receipts tax, $33.24 in interest, and $108.91 in penalty for a

total outstanding liability of $686.72. Interest under both assessments continues to accrue until

the underlying tax principal is satisfied.

DATED: April 26, 2016.

Brian VanDenzen
Chief Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

In the Matter of the Protest of Hubbard Lovell & Co., page 16 of 16